Australia May Cut Benchmark Interest Rate to 5.5%

By Jacob Greber

Nov. 4 (Bloomberg) -- Australia's central bank will probably cut its benchmark interest rate by half a percentage point, the third reduction in as many months, amid increasing evidence global financial turmoil is buffeting the economy.

Governor Glenn Stevens will lower the overnight cash rate target to 5.5 percent from 6 percent at 2:30 p.m. in Sydney today, adding to last month's 1 percentage point reduction, according to 15 of 16 economists surveyed by Bloomberg News. One forecast a quarter point cut.

Falling house prices and retail sales plus October's 14 percent slump in the All Ordinaries Index of stocks, the biggest drop since 1987, has prompted businesses and households to scrap spending plans, driving up unemployment and eroding earnings at companies such as retailer Harvey Norman Holdings Ltd. The U.S., China, India, Japan and South Korea all cut rates in the past week on signs global growth is stalling.

``The sooner interest rates are cut the better,'' said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney. ``After such a courageous policy move in October, it would be extremely worrying if the Reserve Bank now lost its nerve and paused. That would send a very bad message to consumers, who are clearly very nervous.''

Stevens and his board cut borrowing costs by a quarter point in September, the first reduction since 2001, and followed with another 100 basis points a month later amid signs growth is slowing faster than forecast.

House Prices

The Australian dollar fell to 67.87 U.S. cents at 8:19 a.m. in Sydney from 68.06 cents in late Asian trading yesterday. The currency has tumbled 31 percent since hitting a 25-year high of 98.49 cents on July 16.

``The economy is definitely slowing as a consequence of the global financial crisis,'' Treasurer Wayne Swan said yesterday.

Gross domestic product rose 0.3 percent in the second quarter, the weakest pace in more than three years, as consumers cut spending for the first time since 1993.

House prices fell 1.8 percent in the third quarter, the biggest drop since the late 1970s, according to economists at Australia & New Zealand Banking Group Ltd. in Melbourne. Retail sales tumbled in October by the most in three years and job advertisements slid for a sixth month, reports showed yesterday

An index of manufacturing slumped in October to the lowest level since the Australian Industry Group began measuring output in 1992, a report showed yesterday.

Unemployment Rises

Harvey Norman, Australia's biggest furniture and electronics retailer, said sales weakened last month as slumping consumer sentiment curbed demand for televisions and sofas. Revenue from stores open at least a year fell 5.8 percent in the 28 days ending Oct. 19.

Unemployment, which fell to a three-decade low of 3.9 percent in February amid a China-fueled mining boom, probably rose to 4.4 percent last month from 4.3 percent in September, according to the median estimate of 13 economists surveyed by Bloomberg News ahead of a Nov. 6 report.

There is a ``very good chance'' the economy may already be contracting given the ``slew of negative industry anecdotes and early indications of a recession-like drop in business conditions,'' said Kieran Davies, chief economist at ABN Amro Australia Ltd. in Sydney.

``These downside risks should see the Reserve Bank cut rates further, especially when the resources boom appears increasingly under threat, given collapsing spot prices for coal and iron ore and a steep decline in Chinese steel production.''

Inflation Fight

Rio Tinto Group Chief Executive officer Tom Albanese said this week the economic slowdown in China, which buys 17 percent of the company's production, is quickening and demand won't rebound until 2009.

Still, Reserve Bank Deputy Governor Ric Battellino said last week Australia will avoid a recession and still has ``a big task ahead to slow inflation, and this could limit room for maneuvering on monetary policy.''

Policy makers aim to ensure Australia repeats its experience of 2001, when it sidestepped a global recession, Battellino said on Oct. 30. ``That is certainly what we're aiming for, and there is nothing in the data to suggest that we are off track,'' he added.

Battellino's comments prompted investors to pare bets on the size of today's potential interest-rate reduction, according to a Credit Suisse index based on overnight swaps trading. The chance of a 75 basis point cut fell to 38 percent on Oct. 31 from 91 percent at the start of last week.

Loan Repayments

Policy makers raised the benchmark rate 12 times between 2002 and March this year to a 12-year high of 7.25 percent to curb inflation that has surged to 5 percent.

The Reserve Bank in August said inflation will probably peak in the fourth quarter, before falling back within its target range of between 2 percent and 3 percent in 2010.

``Looking forward to next year, forces seem now to be building that will start to dampen pressures on prices, even though we won't have evidence of that for a good six months,'' Stevens said on Oct. 21.

A half-point cut in mortgage rates would reduce repayments on an average A$250,000 ($169,000) home loan by A$90 a month, according to the Real Estate Institute.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net